What Exactly Is a Home Inspection?
A home inspection examines and reports on the condition of a real estate property, typically while it is for sale.
A skilled home inspector evaluates the property’s condition, including its heating and cooling systems, plumbing, electrical work, water and sewage systems, and some fire and safety issues. Furthermore, the house inspector will look for indications of bug, water, or fire damage, as well as any other issue that may impair the property’s value.
IMPORTANT TAKEAWAYS
A house inspection is an investigation of the safety and present condition of a property.
A buyer arranges and pays for a house inspection and then decides whether to proceed to closing, renegotiate the sale price, request repairs, or cancel the sales contract based on the results.
A house inspection is not the same as a home appraisal, which is mandated and scheduled by a lender to establish the value of a property for which a buyer wishes to obtain a mortgage.
A house inspection is one of the criteria considered when appraising real estate for investment purposes.
What Happens During a Home Inspection?
Home inspectors are frequently hired by prospective home purchasers to investigate a property and provide a written report on its state, including an assessment of necessary or recommended repairs, maintenance concerns, and any other potentially costly issues. The physical structure of the home, from the foundation to the roof, as well as the home’s systems, will be evaluated by the home inspector. This inspection will evaluate whether or not the house is code compliant.
A home inspection can reveal a lot about a freshly built home or an existing house to a homebuyer, saving them money and stress. Meanwhile, having a property inspected before placing it on the market allows sellers to make structural repairs or upgrade and replace systems that may boost the possibility of a sale.
A home inspection is typically performed following the signing of a sales contract or purchase agreement between a buyer and a seller. As a result, it’s critical that the contract include an inspection contingency (also known as a “due diligence” contingency), which gives the buyer time to find an inspector, schedule and attend an inspection (if desired), receive the inspector’s report, and decide how to proceed based on the information provided.
Depending on the report’s assessment, which can range from major structural flaws to minor cosmetic flaws, a buyer may opt to proceed with the transaction, arrange additional inspections, renegotiate the sale price with the homeowner, request that particular repairs be performed, or cancel the contract. If the buyer requires extensive repairs, he or she may also seek a re-inspection with the original inspector to ensure that the initial problem has been resolved.
Additional inspections may be performed, for example, to check for asbestos, mold or mildew, termites, vermin, radon, or lead, or to examine sewage lines, chimneys, or other structural components.
Appraisal vs. Home Inspection
A house inspection focuses on the current state of the home and should not be mistaken with a home appraisal, which evaluates the property’s value. Both are vital tasks in the process of selling a home, but they are carried out for different reasons.
The buyer arranges for a home inspection and can then attend to learn about the state and safety of the house and its systems. When a buyer requires a mortgage to buy a home, a lender will request and schedule an appraisal completed by a professional or licensed appraiser.
An appraisal, unlike a house inspection, can affect the amount that can be borrowed and is normally performed behind closed doors without the buyer’s present. An appraiser employs a variety of valuation methodologies, including comparable home prices, the size and quality of the property, lot size, and other factors, whereas a home inspector solely evaluates the home’s condition.
Particular Considerations
Real Estate Investing
The outcome of a house inspection is only one variable in determining the value of real estate.
Real estate investing is analogous to stock investing. There are two primary methodologies: absolute value and relative value. Discounting a property’s future net operating income (NOI) by the appropriate discount rate is analogous to stock discounted cash flow (DCF) estimates. Using the gross income multiplier concept in real estate is similar to using relative value valuations in stocks.
It is crucial in both approaches of real estate valuation to select an acceptable capitalization rate or the required rate of return on the real asset. This is the difference between value appreciation and depreciation.
